Practical capacity
Practical capacity is the realistic maximum output a department can produce after allowing for normal downtime such as maintenance and breaks, used as the denominator when setting a predetermined overhead rate.
See it move
Practical capacity is the realistic maximum output after normal downtime, used as the denominator for a predetermined overhead rate. Corvina Bottling's plant has a practical capacity of 400,000 bottles a year, priced at €2.00 each from €800,000 budgeted overhead. Producing only 320,000 bottles leaves 80,000 unused, and €160,000 of overhead under-absorbed.
The formula
Variables
- Predetermined fixed overhead rate (€ per unit)
- Budgeted fixed overhead (€)
- Practical capacity (units)
Practical capacity is one of several possible denominators; using it produces a rate that makes the cost of unused capacity visible as a separate variance.
Check yourself
Solenne Textiles has budgeted fixed manufacturing overhead of €540,000 for the year. Its practical capacity is 90,000 metres of fabric. Actual production for the year is 75,000 metres, and actual fixed overhead incurred is €540,000. What is the under- or over-absorbed fixed overhead for the year?